With so many concerns over COVID-19, one of the things I’ve been wondering is whether companies will hit the brakes on their international expansion plans. Recent CFO research conducted by Argyle Advisory and Globalization Partners offers some interesting answers. They surveyed 166 CFOs and VPs of Finance at large companies, the majority of which have $500M or more in revenue. They asked them questions about their plans for global expansion, how the pandemic has affected them, and why companies expand into international markets to begin with. What follows are some general and pandemic-related findings worth sharing.
International Expansion Isn’t Going Away
One of the questions the survey asked was, “Does your organization’s long-term strategy include potential (or ongoing) expansion into countries where you do not currently operate?” A full 100% of the respondents at these companies said “yes.” In other words, these companies still intend to keep moving across borders and into places where they do not yet have an operational presence. This might seem surprising given the context of a global pandemic. However, the revenue growth rate that most companies tend to see from international markets can be quite addictive to investors and shareholders.
What’s interesting about the companies reflected in the survey is that more than half (56%) of the respondents had previously expanded into 6 or more countries. So, these are large, seasoned companies that already have extensive international experience. It’s interesting that even though most of them are already committed to international markets, and likely see plenty of market opportunity in those countries, they still seek to expand further into other countries too. It’s a nice reminder for companies that are newer to this that your interest in international will only keep growing.
Reasons Why Companies Expand into International Markets Are Varied
Many people think that the only reason why companies expand into international markets is to capture more market share and revenue growth. That’s often true of companies in their early days of expansion. While growth of course matters, the bigger a company gets, and the more experience they have with international growth, the more benefits they start to recognize and appreciate beyond just growth. Respondents to the Argyle Advisory and Globalization Partners survey were asked, “What were the deciding factors that resulted in your company’s decision to expand and/or hire internationally?
Here are their answers in ranked order:
- Capture market share (49.7%)
- Expand sales presence (44.8%)
- Diversifying investments (30.9%)
- Ability to acquire top talent (29.1%)
- Reduction of costs (29.1%)
- M&A activity (27.9%)
- Add an employee in-country near a customer or client (22.4%)
Companies were allowed to select more than one answer to this question. Depending on your business model, you might have multiple goals to accomplish. The more obvious reasons are increasing market share and growing a local sales presence, but these are not the only reasons by any stretch.It’s interesting to note that “diversifying investments,” “ability to acquire top talent,” along with “reduction of costs” are some of the most popular reasons for international expansion that CFOs, CEOs and other finance executives care about.
The Greatest Concern with International Growth: Operational Complexity
When they asked these internationally experienced companies what they were most concerned about when expanding globally, the biggest concern by far was “dedicating resources to global operations” (29.1%). After that, “devoting resources to compliance resources” (17.6%) and “recruiting talent” (17.6%) were the next most popular items, followed by “devoting resources to tax concerns” (15.8%).
Having worked in international operations for years, and having managed the process of launching offices in Asia, Europe, and Latin America, I can attest that the operational complexity of setting up new offices is much higher than most business people can even begin to comprehend. My list of 141 Questions to Guide Your Local Market Entry is intended to give people new to international expansion work a small glimpse of what a heavy undertaking it can be to launch a new office in another country.
It’s a huge lift not just for the person running the launch process temporarily until the office set-up is complete, but worse yet, for all of your operational teams who have to collaborate to carry it off. This is especially true for your Legal, Finance, BizOps and other teams that will have to support your daily operations not only when you set up the office initially, but there work grows exponentially more complex from that point forward.
Recruiting might also sound like something relatively simple that you’ve mastered in your home market too, but it ranks high on the list of concerns these executives have for a good reason, too. It’s incredibly difficult to convince those first few hires to come and work with you in a new country when you’re completely unknown in that location. Employer branding takes time to build up, and many countries do not have large numbers of people who want to risk working with an unknown brand that only has a tiny office in a new country.
Lastly, there is a huge amount of work for any company doing business overseas related to understanding the local tax implications. The tax burden does not just relate to the initial work of understanding local tax rules and applying them, although that alone is quite an undertaking. Depending on the country and how much revenue you already generate from customers there, your company might suddenly owe such a large amount in local taxes that it can actually cause some of your core financial metrics to change.
In fact, your profit margin and other financials will have to be recalculated, depending on the amount of revenue you already have from a given country that will now run through a new entity. International tax strategy is a highly complex area that even most finance professionals don’t have deep training in and would have to consult with an outside firm to obtain this type of specialist advice. It’s not only that this type of specialized advice that is hard to come by, but it’s very expensive. Figuring out the best tax strategies requires knowledge of local tax laws as well as international taxation rules, and is very time-consuming, because any tax consultant group will need to spend a good amount of time familiarizing themselves with the business and all of its particulars.
How COVID-19 Is Affecting Global Expansion Plans
One of the survey questions asked whether COVID-19 has affected companies’ global expansion goals. Surprisingly, 40.6% said “No,” indicating that COVID-19 had not affected their plans, but that they were in a holding pattern for some defined period of time. A smaller amount, 37%, said “Yes, we are withholding on global expansion.” Surprisingly (to me anyway), 12.7% said “Yes, we are now looking to expand globally,” whereas they apparently had not been prior to COVID-19.
As for areas in which COVID-19 has affected companies’ decision to expand globally, 59.1% said the health and safety of their employees was factoring into their decision, followed by new business strategies (32.9%), and increasing their sales pipeline and revenue (32.3%), reducing costs (28.7%), hiring global talent (26.8%), and diversifying markets (25.6%).
International Expansion: Still Worth It In the End
In spite of the many operational complexities involved in expanding into new markets, I don’t mean to scare people away from international expansion efforts. The lessons learned from this survey primarily apply to larger companies that have quite a bit of experience, and already have a local presence in 6 or more countries. So, if you’re not at that phase quite yet, have faith. Taking your business into new markets and seeing it grow locally, along with witnessing the impact on building the overall global business, is one of the most rewarding professional experiences you can have. You can definitely do it! And, it’s easier if you start small, one country or office at a time.
The desire for international expansion is not fading away, but the ways in which companies gain the ability to employ others, collect payments, and overcome other operational challenges as they enter new markets is very much evolving. The underlying reasons for international expansion, both for companies that seek its benefits, and the customers who want products and services, won’t be going away anytime soon.
However, the operational pains that come with the territory? Most companies do wish those could go away, or at least be lessened. As I wrote in this post about the new normal under COVID-19, more and more companies will be looking for “lightweight” entry methods to avoid taking on so much legal and administrative burden. But even if they can’t, the payoffs to your business make international expansion very much worth the hassle.